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Shree Renuka Sugars Ltd. — Brazil mills driving upgrade
Price Objective Change: Raising PO & EPS on higher realization for Brazil mills; Buy
Renuka Sugar sharply outperformed Indian peers and delivered 52% higher PAT
than estimated in Q4FY10 driven by the benefit of higher sugar price accruing to
its Brazil mills. Recent rise in global sugar price ahead of our estimate is likely to
further boost profit. We have raised PO to Rs114 driven by (1) 10% upgrade in
FY11e EPS (YE Sep) led by higher sugar price for Brazil mills; and (2) lower than
estimated net debt at end of Sep 2010. Stock is trading at 5.3x FY11e EV/EBITA
and we expect it to re-rate to 6x on cyclical recovery.
Q4FY10 PAT up 15% as Brazil helps overcome loss in India
Renuka Sugar reported a net profit of Rs1,171mn including profit of Rs466mn
from Brazil mills, Rs116mn in Indian mills and Rs589mn from Dubai trading unit.
Profit of Brazil mills was driven by rise in ethanol price, which has strong
correlation with sugar price. Company reported FX gain of Rs1,123mn in Brazil
mill, which accrued owing to reduction in long term loan value. FX gain/(loss) is
inherent to the business as the loan in USD is being used to hedge Brazil export.
Benefit of higher global price from current quarter
Recent rally in global sugar price so far has helped boost the profit of Brazil unit
by way of higher ethanol price only as Brazil unit had presold sugar in future
market at average price of UScent16.5/lb. However, from Dec2010 quarter
onwards sugar realization is likely to rise to over UScent21/lb and stay at a
minimum of UScent20.5/lb as the benefit of new contracts will kick-in.
Strong cash generation addresses risk of high debt
At the end of Sep2010 Renuka had a consolidated net debt of Rs48bn including
Rs40bn in Brazil subsidiaries. Net debt to equity at 2:1 is not a worry as it is just
4x the annualized operating cash flow (PAT+Depreciation) of Q4FY10.
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